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Elevator Pitch
I assign a Hold investment rating to Dada Nexus Limited (NASDAQ:DADA). I appreciate that DADA’s shares aren’t expensive based on the Enterprise Value-to-Revenue valuation metric. But I also understand that Dada Nexus deserves a valuation discount for the fact that it is only expected to achieve GAAP profitability in fiscal 2024. As such, my mixed view of DADA translates into a Hold rating for its shares.
Company Description
In its press releases, Dada Nexus refers to itself as a company that runs two key businesses, namely “JDDJ, one of China’s largest local on-demand retail platforms for retailers and brand owners”, and “Dada Now, a leading local on-demand delivery platform open to merchants and individual senders.” The company was first started in July 2014, and its shares were listed on Nasdaq since June 2020.
JDDJ contributed 59% of Dada Nexus’ top line for full-year fiscal 2021, while DADA derived the remaining 41% of its net revenue in the most recent fiscal year from Dada Now. In the third quarter of 2022, JDDJ and Dada Now accounted for 65% and 35% of Dada Nexus’ most recent quarterly sales as highlighted in its latest 10-Q filing.
The Spotlight Is On DADA’s Profitability
Dada Nexus issued a media release announcing its Q3 2022 financial results last Thursday on November 17, 2022. GAAP net loss for DADA narrowed from -RMB543 million in Q3 2021 and -RMB579 million in Q2 2022 to -RMB454 million for the recent quarter.
But Dada Nexus’s actual Q3 2022 GAAP net loss still fell short of the sell-side analysts’ consensus forecast of -RMB409 million by -11% in RMB terms as per S&P Capital IQ data.
Separately, DADA also emphasized at the company’s most recent third quarter earnings call that it “will still (strike a) balance (between) the (revenue) growth rate and the bottom line optimization or improvement.”
Previously, Dada Nexus disclosed at its Q2 2022 results briefing that “JDDJ’s (direct) margin turned positive” for the second quarter of the year for the first time in its history. As such, there were expectations that DADA might place a relatively stronger emphasis on profitability and take a shorter period of time to become profitable on a GAAP basis.
Considering Dada Nexus’ recent comments at the Q3 2022 earnings briefing, the company isn’t likely to forgo rapid top line expansion in exchange for an improvement in margins as what investors would have hoped for. Notably, the current sell-side’s consensus financial projections taken from S&P Capital IQ point to DADA only achieving positive GAAP earnings per share in fiscal 2024.
DADA’s share price pulled back by -3.8% to close at $5.37 as of the end of the November 18, 2022 trading day, which came after the company’s Q3 2022 earnings call in the evening of November 17, 2022. It is likely that Dada Nexus’ wider than expected GAAP net loss and management commentary on profitability have hurt the company’s stock price performance.
In the subsequent section, I discuss about how JDDJ and Dada Now have performed in the recent quarter and contributed to the company’s overall top line growth. Dada Nexus’ revenue jumped by +41% YoY to RMB2,380 million in Q3 2022, and this was largely in line with the analysts’ consensus sales estimate of RMB2,377 million according to S&P Capital IQ.
Both JDDJ And Dada Now Did Well In Q3 2022
DADA’s two key businesses both delivered reasonably good performances in the third quarter of this year.
JDDJ saw its segment revenue grow by +44% YoY from RMB1,073 million for Q3 2021 to RMB1,544 million in Q3 2022. The substantial sales increase for JDDJ in the recent quarter was supported by a +58% YoY in JDDJ’s trailing twelve months GMV (Gross Merchandise Volume) to RMB59 billion as of end-September 2022.
In my view, there were two key drivers of JDDJ’s top line and GMV growth for Q3 2022.
One key driver is that JDDJ has made significant headway in further penetrating specific product segments. For example, DADA disclosed at its Q3 2022 results call that JDDJ’s GMV for “apparel merchants” and ” mom and baby chains” expanded by approximately “8x” and “more than tripled”, respectively as of the end of the recent quarter.
The other key driver for JDDJ is Shop Now. In October last year, DADA and JD.com (JD) revealed that “they jointly launched “Shop Now”, the JD Xiaoshigou,” which allows “consumers to enjoy one-hour delivery service when purchasing products labeled “Shop Now” in the JD App.” JDDJ’s partnership with Chinese retail giant JD in the form of Shop Now has been a great success; GMV for JDDJ surged by +160% YoY as of end-Q3 2022 and has contributed significantly to JDDJ’s overall GMV growth.
Dada Nexus’ other key business, Dada Now, also did well in the recent quarter. Revenue for Dada Now increased by +36% YoY from RMB614 million in the third quarter of the prior year to RMB836 million for the third quarter of the current year. This was no surprise, taking into account the synergies between Dada Now and JDDJ.
In DADA’s Q3 2022 results press release, the company noted that “the vast volume of on-demand delivery orders from the JDDJ platform increases order volume and density for the Dada Now platform.” Given that JDDJ had achieved robust growth in the recent quarter, it was natural that Dada Now also witnessed a meaningful increase in sales for Q3.
In conclusion, both Dada Now and JDDJ delivered good revenue growth in Q3 2022. However, Dada Nexus’ profitability is arguably a more important issue for investors in the current market environment, which I touched on in the preceding section.
Undemanding Valuations Validated By Share Buybacks
DADA’s valuations are undemanding, and this is validated by the company’s share repurchases.
As per S&P Capital IQ’s valuation data, Dada Nexus currently trades at a consensus forward next twelve months’ Enterprise Value-to-Revenue multiple of 0.41 times. In comparison, DADA’s consensus fiscal 2023-2025 revenue CAGR is an impressive +29%.
Year-to-date in 2022, DADA’s share price has dropped by -59%. At the end of the previous year, the market valued Dada at 1.84 times (versus 0.41 times now) consensus forward next twelve months’ Enterprise Value-to-Revenue.
Notably, Dada Nexus has done the right thing by initiating a $70 million share buyback plan in March 2022. Between March and September, Dada Nexus has already spent $56.6 million on share repurchases. This is the best validation of management’s views regarding the undervaluation of the company’s shares.
Closing Thoughts
A Hold rating for Dada Nexus’s stock is fair and appropriate. DADA’s current enterprise value is less than half of its forward revenue, which offers an indication of the stock’s depressed valuations. But Dada Nexus’ most recent Q3 GAAP net loss didn’t meet the market’s expectations, and the company will take time to become profitable on a GAAP basis.
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